Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance

Abstract

and members of the FDIC for comments and helpful feedback. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Deposit Insurance Corporation or the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Liquidity Transformation and Fragility in the US Banking Sector

“…But, our results go beyond that to establish stark differences between insured and uninsured deposits. Recent evidence suggests that banks attempt to deal with the fragility of their uninsured depositor base by actively attracting insured depositors in times of poor performance (Martin, Puri, and Ufier, 2018;Chen, Goldstein, Huang, and Vashishtha, 2020). Consistent with this, we find that the sensitivity of insured deposit flows to bank performance is in fact negatively related to the extent of liquidity mismatch.…”

Deposit Insurance and Depositor Behavior: Evidence from Colombia

“…The lower elasticity in Colombia can reflect the fact that our estimate for the US is biased by confounding factors related to the 2008 financial crisis. For example, this upward bias can be due to the existence of fragile banks, with an aggressive attitude to attract deposits, in line with the work of Martin et al (2018). If prior to 2008 these banks were both raising more deposits (including insured ones), and responded more aggressively to the increase in the insurance threshold, the estimated elasticity would be biased upwards.…”

“…Financial regulation is central in this process because it can set appropriate incentives for risk-taking and it can lay down adequate capital and liquidity provisions. Among the various tools to regulate financial institutions, deposit insurance is one of the most prominent (Diamond and Dybvig, 1983;Diamond and Rajan, 2000;Goldstein and Pauzner, 2005;Davila and Goldstein, 2020) and has been extensively used in history, around the world and during the 2008 financial crisis (Calomiris and Kahn, 1991;Demirgüç-Kunt et al, 2015;Martin et al, 2018;Calomiris and Jaremski, 2019;Iyer et al, 2019).…”

“…Egan et al (2017) study whether a bank's financial distress affects deposit demand through a structural model in the United States and find that the demand of uninsured deposits declines with financial distress. Martin et al (2018) show that when uninsured depositors leave the bank under stress, they typically withdraw a large share even of insured funds, creating additional distortions. Recently, Artavanis et al (2019) introduce a new approach to identify whether deposit withdrawals are due to fundamental uncertainty or to expectations on depositor behavior.…”

Would Macroprudential Regulation Have Prevented the Last Crisis?

“…For deposit-takers, it refers to (estimated) uninsured domestic deposits and foreign deposits relative to total assets. While deposits are typically short-term liabilities, many types of deposits, including insured deposits in particular, are "behaviorally stable" and were not withdrawn during the crisis (Martin, Puri, and Ufier 2018). "Large commercial banks" are defined as banks with at least $150 billion in total assets.…”